The Complete Beginners’ Guide to Forex Trading
Welcome to Forex!
Hello prospective trader!
Welcome to my complete beginners’ introduction guide to forex trading.
This guide is specifically targeted towards people who are curious about forex trading but have no idea what it is or where to start learning the skill and don’t have a mentor to show them the ropes.
I’ve been trading forex actively for a little over 3 years as of writing this (since January 2017), which although feels like a long time, really isn’t. This puts me in a great position to guide new traders into the industry given that I still vividly remember how difficult it was to get started as a forex trader.
Becoming a forex trader (or a trader of any market) is going to take a lot of time, sacrifice and commitment. It’s not an easy path to making money, but it’s still one of the best vehicles available for everyday people to achieve financial independence through mastering the skill of compounding their risk capital.
But before we begin it’s very important that I warn you about the danger of entering the game for the wrong reasons. You must respect the markets.
This is not a place to get rich quick. You can get rich from trading – just not quickly. It takes time. If you come here with the “get-rich-quick” attitude, you will be carried out with the thousands of other traders who come into the game unwilling to earn the right to make big money – and end up losing it all.
There is a LOT of potential risk involved with trading – especially if you don’t understand or respect the importance of risk management like these guys didn't.
You must take the time to master the foundations of trading. Depending on your time commitments such as work or school or other responsibilities, this could take you anywhere from 6 months to a few years.
The typical trader who achieves success takes a minimum of 18 months before they become consistently profitable. But every single one of those traders who has made the cut will tell you that it’s well worth the investment of your time.
So strap in, prepare for many months of frustration and challenge, and get ready for one of the most exciting and rewarding journeys of your lifetime!
What Is The Forex Market?
The Forex Market stands for the “foreign exchange” market.
This is a place where people, banks and companies can exchange one national fiat currency for another.
Every currency has its own price and valuation in relation to other currencies, and these values fluctuate every second of every day based on political and economic circumstances.
It’s by far the largest financial market in the world, accounting for over $6 trillion U.S. dollars in exchanges per day. That’s several times greater than the daily trading volume of the entire U.S. stock market.
The reasons why people might want to exchange currencies are infinite in number and can range from complex reasons such as hedging a farm’s productive output against the risks of exporting to a foreign country with a currency that is highly volatile and unpredictable in value, to simply changing one national currency for another so that you can go on holiday or send money to family.
For example, if you’re an Australian like me and you plan a trip to America, you will need to convert your Australian dollars into U.S. dollars before you get there. It is the Forex Market that accommodates this exchange.
The reason why this is necessary is because no American with any sense is going to accept Australian dollars for their goods or services when the Australian dollar is only worth 61% of one U.S. dollar (at the current time of writing this).
This means that at the current market rate, you can exchange one Australian dollar for 61c of American dollars. And if you happen to have a good reason to believe that the Australian dollar will appreciate against the American dollar in the near future then you can essentially place a “bet” on the direction of the currency appreciation through forex trading.
By buying Australian dollars against the U.S. dollar, you can profit from the difference as the Australian dollar increases in value against the American dollar. But of course, if you’re wrong, and the Australian dollar continues to depreciate against the American dollar, then instead of making a profit you will be taking a loss.
A forex trader profits from fluctuations in the currency exchange rates, and takes a loss when they are wrong on the direction of their bet. The way that they make money is simple: when they’re right, they make more money than when they’re wrong. And when they’re wrong, they only take a small loss.
Here is one of the best instructional videos I’ve come across summarizing the complex functionality of the Forex Market:
What Is Forex Trading?
Ok, but what is forex trading?
Forex trading in the manner that I’m going to teach you is referred to as “speculation” in the financial industry.
Currency speculators are people who participate in forex markets not because they have a need to for business purposes (like hedging their productive output or doing a deal with a foreign company), but because they simply want to profit from moves in the markets.
There is a very thin line between a gambler and a speculator. The main difference is that the gambler bets on games where the odds are against them to win, while the speculator does everything he can to put the odds in their own favor to win.
The gambler goes to the casino; the speculator is the casino.
Speculators can often degenerate into gamblers when things go badly for them, and gamblers can often make great speculators once they master the skill.
Many professional poker players and casino players pick up trading very easily, and many traders who do not treat trading with a professional attitude tend to fall into the trap of treating their trading like gambling very easily.
A forex trader (or speculator) is a person who actively bets on the fluctuation of currency exchange rates. A trader who works for a Wall Street-type firm is referred to as a “proprietary” trader or a “professional trader”. We as independent non-professional traders who trade our own personal accounts are referred to in the industry as “retail” traders.
Retail traders can be anyone from a total beginner who sucks and consistently loses, to a full-time trader and multi-millionaire who has become a big fish in the game and is consistently profitable.
A successful forex trader will only place their bet when they are certain beyond a shadow of doubt that the trading opportunity they are acting on has a positive statistical expectancy – meaning that if they take this bet 100 times, they will either win 50% of the time or more, or they will make so much money when they’re right that it will negate all of their recent losing.
Therefore they make their money through long-term compounding and not by catching big winners or being right in their bets all the time. Even the most successful traders in the world lose trades very frequently, which is where “risk management” comes into play.
Unsuccessful traders do not have a trading plan or trading strategies that they have confirmed to have an edge (which I will explain how to do later). Or if they do, then they are typically unsuccessful because they allow their emotions and ego to cloud their judgement and they self-sabotage through recklessness and/or negligence until they ruin their trading account.
We’ll discuss the importance of trading psychology and risk management later, but just know that the most common reasons for failure in the forex trading industry is due to poor trading psychology, self-discipline and mental fortitude. As Mike Tyson says: “Everyone has a plan until they get punched in the mouth.”
In any case, the way a successful forex trader consistently identifies high-probability trading opportunities is through the art and science of “technical analysis”. Technical analysis is the main skill you will need to develop as a retail trader in order to develop what we call an “edge” over the markets.
What Is Edge?
Every trader has a slightly different interpretation and definition of “edge”. If you asked 1,000 traders what their edge was, they would all have different answers even if they trade similar strategies and markets.
However, one characteristic of an edge in which all traders will universally agree is that it makes you money over time.
Not on a trade-by-trade basis – but over hundreds and even thousands of trades and multiple months and years.
It is highly personal and includes psychological components, as bad trading psychology can easily sabotage a trader’s edge and cause them to lose money when they should have made money.
It does not necessarily have to mean that they win more trades than they lose, although for some traders it does mean that. But more importantly it means that over time their winners always make up for their losses (and then some).
Losing is a part of the game, after all. In trading, there is no way to avoid losses.
What Is Technical Analysis?
Technical analysis is the skill of reading “price action”. Price action is what we call the historical records of price movement.
Whenever a trade is executed by big players in the markets (eg. banks, corporations etc.), they usually have an impact on the balance of supply and demand, which affects the currency exchange rate.
Through the art of “charting”, we can map out the speed, duration and distance of price movements. Through analyzing the nuance of these movements, we can learn to identify recurring patterns in the markets that give us “clues” as to where price might be headed next.
By collecting these clues and building a confident case for entry in one direction over the other, we can create trading “strategies”. A trading strategy is simply a set of rules for acting on a specific recurring pattern in the markets that gives you a high probability of making money over an extended period of time.
There is no such thing as the “best” strategy; only the best strategy for your personality. There are literally thousands of ways to make very good money in the markets – the most important thing is not that you find the “best” one, but that you find ones that you feel comfortable and confident trading.
The image above represents a trading opportunity I took recently on the Euro versus the U.S. Dollar on the 1-Hour chart. The red box represents my original risk (called a “stop loss”), and the green box represents my open profit.
If price had reached the lower extreme of that red box then I would have been “stopped out” for a small loss of -1% of my total account balance. But in this particular case, price respected my analysis and the trade played out profitably to the tune of +3% or more and I have taken all of my risk off the table by moving my protective “stop loss” to break even.
This means that now that this opportunity has begun to play out as expected, I can’t lose any money if the trade suddenly reverses on me. I plan to ride this move up for as long as possible until I get a pattern from price action that tells me it’s a good time to exit the trade for a profit.
By analyzing the recent movements of price action I was able to identify a high-probability zone where price was extremely likely to react in this manner – and then I systematically exploited it to make money!
This is the core concept of trading using technical analysis – identifying zones of value and then waiting for confirmation from a price action pattern that this zone is in fact having an effect on price before you place your bet.
To do this, traders use what is called “charting software” to perform their analysis. There are literally hundreds of charting software providers on the internet and most of them are either ancient and clunky, or unreasonably expensive, or they lack important features.
The good news is that you don’t have to try them all to find out which ones suck, because I already have, and in doing so I’ve found the best one: TradingView.
The first thing you should do is create a free account on their website and start playing around with their charts and drawing tools. Don’t worry, until you put money into a brokerage account it’s entirely risk-free and you can’t screw anything up. Experiment as much as you can.
There’s a lot to learn, but if you’ve ever used Photoshop or even Microsoft Paint (or Paintbrush if you’re an Apple user), then you’ll pick it up in no time. Here’s a more detailed article about TradingView if you’re curious: TradingView: The Ultimate Charting Platform Review.
What Are Candlesticks?
There is an infinite amount of timeframes you can choose to load your chart data from, starting with the 1 minute chart, all the way up to the Monthly chart. Depending on your trading style and time schedule, you will generally ignore most of these timeframes and focus only on two or three.
The most popular trading timeframes are the 5 minute chart, the 15 minute chart, the 1 hour chart, the 4 hour chart and the Daily chart. Whichever timeframe you are on, the colored candles represent one trading session of that timeframe.
There are many different ways to represent price action, from bar charts to line charts to moving averages and range bar charts. You will learn about all of these later, but to begin with you should focus on the most popular way to read price action in forex: candlestick charts.
Price action is “fractal” in nature, meaning that the characteristics that define the 4 hour chart can also be found on the 1 minute chart. Obviously the magnitudes and scale will be different, but the core trading concepts that you learn regarding technical analysis apply to all timeframes.
In the above screenshot, each colored bar (usually referred to in forex as a “candle”) represents one hour’s worth of “price action”. The little “wicks” or lines on the top and bottom of the colored candles represents the extremes of price during that hour.
Here is a basic diagram explaining the anatomy of candlesticks:
The term “bullish” refers to price moving up and is typically represented by the color green, while the term “bearish” refers to price moving down and is typically represented by the color red.
As you can see, the candlesticks’ anatomies are almost identical. The only difference is that a red candle’s body opens at the top and closes at the bottom (moving down), and a green candle’s body opens at the bottom and closes at the top (moving up).
These candles tell a story over time. Depending on the size of the wicks, or the bodies, and by comparing those two things to recent price action patterns, you can get a “read” on price. For example, when a big green candle closes after a small red candle, this is usually a sign that price wants to move higher more than it wants to move lower.
By learning these patterns and what they mean, we can develop trading plans and strategies around them. Then we can systematically exploit them to make profits over time.
We do this by keeping our losses small when we’re wrong (which will be often), and letting our winners play out when we’re right – and managing them in a way that maximizes their profit potential.
Technical analysis will take you some time to learn, perhaps many months depending on how much time you have to dedicate to daily study.
Be patient with the process, and have fun with it. Experiment, open up a demo account and start playing around with ideas and studying various candlesticks and patterns until you feel confident in your ability to follow the story of price action.
For more detailed information I highly recommend watching this video that my trading mentor created on the subject:
What Is Price Action & Trend?
Traders refer to movements in price and the recurring patterns that characterize price movement as “price action”.
Price action is the story that price creates as it moves from one price to another. Depending on what happens between a move from one price to another determines how other trades interpret the “health” of a market.
If a market is deemed to be “bearish” in health as a result of the story told by price action, then they may actively stalk the market for “short” entries (or opportunities to bet on the market continuing lower).
Conversely, if a market is deemed to be “bullish” in health by the story of price action then they might actively stalk “long” opportunities (betting on the market continuing higher).
Going long means placing a trade with anticipation of price moving higher, while going short means placing a trade with anticipation of price moving lower.
If a market’s price action has been telling a story that leads the majority of traders to believe that it is heading higher or lower (as opposed to sideways or with no direction having precedence over the other which is referred to as “consolidation”) – then the market is considered to be “trending”.
If a market’s swings have been making higher highs and higher lows over the past few dozen candles, then traders typically consider the market to be in a bullish trend. And if the past few dozen candles have been making lower lows and lower highs, they consider it a bearish trend.
Here are two video lessons that explains the nature of trends and the interpretation of price action as a story:
What Are Indicators?
Indicators are the trader’s equivalent of tools. A builder needs their power tools; a trader needs their technical indicators.
A technical indicator is essentially a computer script that analyzes the most recent historical price action for you and detects patterns or characteristics, and then visually represents that information to you in the form of some kind of number, text or chart. You can then use this information to make better-informed trading decisions.
Not all traders use indicators and in fact, generally speaking, the fewer you can use to get the job done, the better. But 99% of successful traders depend on at least one form of technical indicator.
There are literally thousands of different types of indicators ranging from very popular to very obscure, and very effective to incredibly useless. In any case, it’s very important that you master the skill of reading “naked” price action (a chart with no indicators on it) before you slip down the rabbit hole of technical indicators. So I won’t go into more detail here.
Although understanding indicators is very important to your success as a trader, this is a rather complex subject to get into here and it’s outside the scope of a beginner’s introduction guide. One day soon I will write another guide covering this subject in more detail and link to it here when it’s done.
But if you’re curious and want more information or examples of technical indicators then you can check out some of the ones I’ve personally created to assist in my own trading process by clicking here.
What Is Fundamental Analysis?
So that’s technical analysis, which is the main tool that retail traders such as myself use in order to make informed decisions in the forex markets.
But obviously past price movements don’t always cause future price movements. More often than not, movements are caused by what we traders refer to as “the fundamentals”.
Fundamentals are basically political and economic factors that drive a national currency’s valuation. For example: interest rate changes will drastically affect the valuation of a currency in relation to other currencies.
Whenever an interest rate change is made, especially unexpectedly, the forex markets can often react in a very volatile and erratic manner. Likewise, if some other important economic health metric exceeds or misses expectations (such as employment numbers or consumer sentiment for example), then there can be large moves in price as a result.
Traders who have access to information resources and the training and cognitive skills required in order to analyze this economic data ahead of time in order to come to educated conclusions and predictions about those numbers can use this information to trade profitably.
However… the resources required to do this effectively are immense. Typically speaking, the only people who rely exclusively on fundamental analysis for their trading are hedge funds and certain styles of professional proprietary trading firms.
99.9% of retail traders use technical analysis exclusively for their trading decisions. This is because we all have access to extremely detailed price action analysis tools and resources, and for the most part, that is all that is needed in order to develop profitable trading systems. Price action always leads the way.
Usually someone who trades based on the fundamentals will develop their directional bias from their economic and political predictions, but they will use technical analysis to time their entries and confirm their bias.
Therefore it is probably appropriate to think of technical analysis as a tool for timing optimal entries into trading opportunities that can be applied by any trader of any style. The more you understand about fundamental analysis the more effectively you can use this tool, but a basic mastery of simple probability theory and sound risk management practices is enough to get you into the realm of consistent profits.
Using technical analysis we not only develop a probabilistic framework (much like weather reporting) to determine the future direction of price based on past patterns, but most importantly – we can also use it to define objectively and exactly where price must go in order for us to consider ourselves wrong about our forecast on the direction of price.
This allows us to determine our risk size per trade and our “uncle point” – the point where we give up on the trade, take our loss, save our capital from a big hit, and move onto the next high-probability high-reward setup. This is to protect ourselves from making trading decisions based purely on emotional stimulus.
Because there are no certainties in trading, it is extremely important that you get used to the idea of accepting losses. Holding on to losing positions is the number one cause of retail trader implosion. More traders have blown their accounts from this than from any other trading transgression.
Using technical analysis, we can identify opportunities in the market that provide better reward potential compared to our risk. We use technical price levels to protect our trades by placing “stop loss” orders on the other side of these levels (which is called “market structure” in trading).
The beautiful thing about technical analysis (also referred to as TA) is that you can almost completely ignore the fundamentals and still be a profitable trader.
Most retail traders simply stand aside whenever a high-impact news event is due to be released, and they wait until the excitement blows over before getting back into their routine of trading recurring price action patterns using TA.
All traders around the world have access to the global “Economic Calendar“. This is a constantly-updated list of upcoming fundamental news events, their predicted outcomes, and their expected impact on price.
Each week I copy the high-impact news events on the economic calendar onto my whiteboard next to my desk so that I can be prepared in advance and cautious around these times.
I mostly use these times to know when not to trade, or if I’m already in a trade, then I make sure to protect the position as best as possible before the news release.
I would encourage you to ignore the fundamentals and do not try to guess or trade the volatile outcomes as that’s just a form of gambling. Unless you genuinely understand the data, just ignore the fundamentals.
Believe it or not, understanding them is optional for retail traders who use technical analysis. Obviously a thorough understanding of both fundamental and technical analysis will maximize your profitability, but fundamentals are the last thing you should devote your time to mastering as a price action trader.
What Is A Stop Loss?
I’ve mentioned the “stop loss” a few times so far, but if you’re anything like me when I first began trading you’re probably wondering what the hell is a stop loss?
Well I’m glad you asked now and not later, because failure to use a stop loss is the number one cause of retail trader destruction!
A stop loss is exactly what it sounds like – it’s a trading “tool” designed to stop your loss. This is something that is extremely counter-intuitive with trading and takes a while to wrap your head around, but the fact is: in order to make money as a trader, you must first make peace with losing money.
There is no such thing in existence as a fool-proof trading strategy. Not even the most talented and richest traders on earth with all the money in the world to throw at their trading business could build such a thing.
There are some strategies that have a ridiculously high win rate in the 70%+ range, such as some of the strategies employed at Wall Street’s best and brightest proprietary trading firms and hedge funds.
These types of extremely accurate strategies are rare even on Wall Street and practically nonexistent in the world of retail trading. But it doesn’t matter, because believe it or not – you can still make plenty of money in the forex markets while losing more trades than you win.
Imagine a coin toss with a 50% chance of heads and a 50% chance of tails. This is the typical retail trader’s win rate. Somewhere between 40% and 60%, but typically towards the lower end of the scale.
Now imagine that every time you flip the coin and it lands on heads, you lose $100. But every time it lands on tails, you win $250. If you have any sense (and enough money to get started) – you would flip that coin all day! And so you should. It’s a fantastic bet!
Assuming you start with enough money to survive any random losing streaks that occur, you are guaranteed to make money over the long-term!
This is how your trading should look. Whenever you lose a trade, you should only lose a fraction of your total trading capital. If your account balance is $10,000 and you only risk 1% per trade (which is the “standard” amount of risk among most retail traders), then you should only lose $100 every time you are wrong about a trading opportunity and the market goes against you.
But when you’re correct about a trading opportunity then you should do your best to make sure that your profit not only covers the initial $100 risk before you close the trade, but you should try to aim for much more than that. A profitable trader only acts on trading opportunities that offer a risk:reward profile that makes sense from this probabilistic standpoint.
If your average winning trade is closed out at a +2% gain (or $200), then you will be extremely profitable even with a win rate as low as 40% – meaning you could lose 6 trades out of 10 and still make really good money!
Now before we continue, if your first thought when you see these numbers is what the hell? 1% risk? That’s way too small!
Then you’re not ready to become a full-time trader. You do not have enough starting capital. You can start learning and mastering the skill of trading with as little as $10, but if you want to make sustainable wealth out of the markets then you must be extremely conservative and strict with your risk management.
There are times when increasing your risk makes sense and you can double or even triple this number to 3%, but for the most part, keeping your risk below 3% is advised. The reason for this is so that you can survive the inevitable and dreaded “drawdown”. The brutal losing streak befalls even the best traders at times, and if you can’t survive losing 10+ trades in a row then you’re screwed.
And believe me when I say that you will lose 10 trades in a row at some point, no matter how good your strategy is. So before you begin your trading journey, make peace with the fact that losing and being wrong is going to be a common occurrence – and prepare in advance accordingly by managing your risk appropriately at all times.
This is an extremely simplified overview of this concept. If you want far more detailed information about the basic mathematics behind a successful trading system then check out my article titled The Math of Winning.
What Is A Drawdown?
Ah, yes, the drawdown. Every trader’s arch nemesis.
There’s not a single trader on earth who will tell you that they enjoy going through drawdowns. But there’s also not a single successful trader on earth who hasn’t been through one.
This is the rite of passage for all traders. If you cannot mentally endure losing streaks and cold periods in your trading, then you will not stand a chance as an active trader.
Because we use the aforementioned “stop loss”, that inevitably means that we are going to run into occasions when the market refuses to cooperate with our strategy for a while and we encounter a streak of losing trades.
This is the cost of doing business as a trader. It’s natural and happens even to the best of us. All businesses have operating expenses and ours are broker fees, commissions and drawdowns.
If you think of it that way then it becomes a lot easier to accept. And once you accept it, you stop struggling against it, and then you are less likely to make poor trading decisions.
Technically speaking, a drawdown is what forex traders refer to as the percentage decline from the previous equity high. On an equity curve chart, it looks like this:
This is a screenshot of my trading mentor Steven Hart’s equity curve so far for 2019. The line graph represents his P&L (profit and loss) in percentage terms for the year on a trade-by-trade basis.
Steven had a fantastic start to the year, reaching a +60% return in the first six months. But then he encountered the dreaded double-digit drawdown – and entered a brutal losing streak, losing -20% of his profits for the year.
As you can see, he spent several weeks trading actively without making any money. The green lines represent the moments when his account reached a new “high water mark”, and then a losing streak began.
The drawdown isn’t considered “over” until the previous high water mark (or “equity high”) is breached.
Steven has a phenomenal win rate, far exceeding 50% – and he still encountered a period of losing that saw him give back a large chunk of his profits for the year.
This affects all traders no matter what market you trade, no matter what style you trade, no matter what risk management system you use, and no matter how good you are at the art and science of technical analysis.
Prepare for this in advance. Take this into account when you open your first live trading account (which I do not recommend you do until you’ve finished your backtesting and demo trading process, which I will explain later).
When you decide you’re ready to begin trading live, remember that the chances of you encountering a nasty losing streak are 100%. So don’t put all your trading capital at risk all at once, and don’t risk more than 1% per trade until you’re confident that you and your trading system can handle the extra risk.
But don’t worry – this isn’t entirely out of your control. Drawdowns happen to everyone, but you do have some power over how bad they get.
Your max potential drawdown is determined by the strategies you choose to trade and the risk management system you choose to use. When they occur is mostly outside of your control, but how bad they get is somewhat within your control and somewhat predictable based on your backtesting data.
Nothing in trading is certain, so you must always allow for some variation in the live markets. But by backtesting your strategy and optimizing your risk management plan to maximize your profit potential while reducing your drawdown severity, you can craft a trading plan with P&L characteristics that you feel comfortable with.
What Is Backtesting?
The only thing worse on the soul than drawdowns is backtesting.
It is the equivalent of homework for traders. No one enjoys it, but all the best students of the market get it done anyway.
Backtesting is the process of going through historical data ONE BAR at a time from left to right and simulating your analysis as if you were doing it on a live market.
You enter each trading setup that meets your trading rules into a spreadsheet – including the market, the time and date, your risk amount, and the outcome. Once you’ve collected enough data, you can use the information to calculate your statistics and get a firm idea of what to expect out of your strategy in terms of potential profit, average and max drawdown etc.
The purpose of this process is to test your strategy and your trading thesis against historical price action. The idea is that if what you plan to do in the markets worked in the past, it is likely to continue working in the near future.
And likewise, if what you plan to do in the markets doesn’t work on historical data then there is a good chance it won’t work on the current live market either.
It is a monotonous process that can take many hours to complete for each currency pair and timeframe you plan to trade. But the more thorough you are with your backtesting the more confidence you will have in your trading plan when you are finished.
When I went through this process for the first time I personally backtested over 2,000 trades across historical data from 2015 until now. That’s what it took for me to feel comfortable diving into the live markets.
It took me over a month to complete this process, but it was well worth the time spent. After completing this process, I then had my first 4 profitable months in a row. Up until that point I hadn’t had a single profitable month.
Ever since then I have been consistently profitable and I have been ending most months with a positive gain. I cannot stress the importance of backtesting enough. It’s something you must do if you plan to be a systematic rules-based trader.
What Is Systematic Rules-Based Trading?
Your biggest enemy in the markets is not the market itself, but your own emotions.
Your emotions will get the better of you if you let them, and they will cause you to make the worst possible decisions with your money in the markets. The markets have a way of bringing out the worst in you if you don’t prepare in advance to be confronted with this challenge.
The best way to overcome this very common and very natural human limitation within your trading process is to have rules for everything.
You need to develop what is called a Trading Plan. In this plan you will write down the following information very clearly and with little room for interpretation:
- The markets you plan to trade
- The timeframes you plan to trade
- The times of day you plan to trade
- The market conditions you plan to trade
- The rules for trading setups you plan to trade
- The rules for how you plan to manage open positions
- The indicators you plan to use
- Anything else that regularly affects your trading decisions
If it’s not in the plan, you don’t do it. It’s that simple.
If you can be disciplined enough to do this, then you will eventually develop consistency in your trading. And that should be your primary goal when you begin trading. It’s more important to be consistent than to make money.
Without consistency, you cannot improve your systems as a trader because you won’t even know where to start. Inconsistency with their trading process is a major cause for why many traders struggle for years to find success.
Do your best to be consistent with your trading before you are consistently profitable, and then you’re only a few small steps from being a consistent loser or a consistent break-even trader to becoming a consistently profitable trader.
And those steps are: analyze your trading results, look for things to improve, then adjust your rules to make your trading plan even better. Then backtest it to prove that it works, then apply it to your live trading, then rinse, and repeat.
This is the eternal process of systematic rules-based forex traders, and it never ends.
What Is Discretionary Trading?
Discretionary trading is something that I would encourage you to stay away from in the beginning of your trading career.
Discretionary traders depend on their skill, experience and “feel” for the market in order to trade profitably. They might have rules for their overall process, but they treat every single trade differently to the last trade and are rarely consistent with their trade management (or else they would be a systematic trader).
This style of trading can be extremely profitable for talented traders who have a natural gift for interpreting price action, but it can be extremely dangerous for new traders who have no method and no grasp on risk management.
I’d recommend researching this style of trading after you’ve already found some success with disciplined and consistent systematic rules-based trading, which is the equivalent of learning to ride your bicycle with training wheels on vs. jumping straight onto a motorbike with no experience whatsoever.
It might be exciting, sure, but it won’t end well!
What Is “Good” Trading Psychology?
There is so much that goes into good trading psychology that it would be literally disrespectful to the discipline for me to tell you I can explain it all in a beginner’s guide.
But I can absolutely set you on the right path and tell you what concepts to focus on first and give priority to.
Becoming a successful trader is very much like becoming a successful athlete or musician. All athletes and musicians need to learn the basics of the game or genre they choose to play.
But once they master those foundations, such as appropriate fitness and understanding of the game, or competent proficiency in music theory and a great grasp of an instrument, there are only mental obstacles that remain in the path of their success.
So it is with trading. Once you master these basic concepts and have a firm understanding of how the markets function and how you can exploit them to your own advantage, you then must master yourself in relation to your newfound skills.
If you are undisciplined in your lifestyle or your emotional control, if you are lazy or refuse to accept responsibility for the consequences of your decisions, if you are dispassionate about trading or in the game for the wrong reasons (such as to get rich quickly with minimal effort), then you will fail.
This is in fact the best part about trading.
Think about it. What it means is that the more self-awareness you develop, the more self-discipline you develop, the more self-control and emotional restraint you develop, and the more character you build out of yourself in the face of adversity and humbling challenges, the more money you can make.
In fact, the amount of money you make out of the markets is directly correlated to the amount of self-mastery you have accomplished.
This should be an encouraging and inspiring realization. For me personally, this is my favorite thing about trading. I have a financial incentive to become a better person.
The more self-control I develop, the more self-awareness I develop, the more intuition I develop, the more focused I become and the more detached from ego and outcome and the more involved I get with the Process Over Outcome mentality, the better my trading results get.
For me, it’s what makes trading the best job in the world. In fact, for me, I don’t consider it a job at all. I’m lucky to be a trader. I’m excited every day to get out of bed and begin my trading process.
Once you become proficient as a trader, the money becomes a background thing. Of course the more ambitious you are, the more you will focus on the money you can make.
But a side effect of continually striving to master your trading and yourself is that you will begin to appreciate life more. You will stop associating your time with money. You will develop a “wealth” mindset, not an employee mindset.
You will have better relationships, and you will feel more confident about yourself and your own future.
Of course, if you do not take the time or put in the effort to master trading psychology earnestly, then trading can have the exact opposite effect on your life.
There are many, many traders who ruin their lives through trading. The same way that many people ruin their lives through gambling.
So take this message of encouragement with caution: you must respect this craft and take it very seriously, or else it will eat you up and spit you out broke and beaten without mercy – and with no participation trophies.
In order to be extremely successful as a trader you must do all of these things without exception:
- Have a tireless work ethic and/or enthusiasm for the game of trading
- Believe in yourself
- Respect risk management
- Honor your stop loss – always (or pay for it!)
- Find a trading methodology that suits your natural strengths & weaknesses
- Have a growth mindset, not a “fixed” mindset
- Be prepared to lose – often
- Be comfortable being wrong – very often
- Have a winner’s attitude and resilience in the face of eternal challenge
- Keep a detailed journal of your trading records (including your thought process)
- Be humble, flexible, always willing to learn and never stubborn
- Be confident taking risks and making your own decisions with your own money
- Have a positive internal belief about money
- This one can take a lot of work and time for some people
There are many more elements that go into good trading psychology, but I’ll leave that to the experts to explain.
Below I’ve included two videos by famous trading psychologist Dr. Brett Steenbarger. Brett works as a trading performance coach at a proprietary trading firm on Wall Street called SMB Capital.
The traders at SMB don’t screw around. They make serious money out of the markets, and they are the leaders of their game. Stock trading is very different to forex trading in a lot of ways, but in one way it is practically identical – and this is trading psychology.
Stock traders, even elite Wall Street traders, suffer from Trading Psychology obstacles of varying degrees. And given how emotionally excruciating and frustrating trading can be, it’s no surprise that expert psychologists like Brett are highly paid to keep big earners and developing traders such as the ones he mentors at SMB from having psychological melt downs – or worse – blowing their accounts.
Brett does a fantastic job of explaining the key core concepts of healthy trading psychology and summarizing the process that all of the best traders on earth – without exception – adhere to.
Besides the infamous Dr. Steenbarger, there are many other great trading psychologist experts worth investigating such as Mark Douglas, Dr. Ari Kiev, Dr. Denise Shull, Steve Ward and Jack D. Schwager.
This article is a work-in-progress and I am continually updating it, so please feel free to leave a comment with suggestions or feedback.
There are many more subjects to cover, and in the meantime you can get more information from BabyPips.com – the go-to website for new forex traders.
If you are looking for personal mentorship and help in your journey to become a consistently profitable trader, then check out my mentor’s education course at thetradingchannel.net. I also wrote an article explaining my experiences with tracking down a good mentor called How To Find A Trading Mentor.
But if you’re unsure of where to start, then just check out Steven’s course. He will teach you everything you need to know to master forex trading once you learn these basic forex concepts.
Last Updated: 28th November, 2019